Australia | Jul 21 2011
– Asciano signs new container ports contract
– Deal to boost earnings and market share
– Brokers continue to see value at current levels
By Chris Shaw
While it had been widely expected in the industry, the container ports contract Asciano ((AIO)) announced yesterday with Maersk was still well received by brokers covering the company.
The contract will add 10% to Patrick Container Ports volumes in FY12, while UBS expects it will also lift market share for the group back to around 48% next year compared to 44% this year. This is an acceleration in terms of market share improvement, as JP Morgan had previously expected to would take around three years for Asciano to deliver such market share growth.
The new volumes from the Maersk contract should add $42-$45 million in container terminal revenue in FY12 on JP Morgan's numbers, which should translate to $13-$15 million in EBITDA (earnings before interest, tax, depreciation and amortisation) terms.
There is some upside risk to this number, JP Morgan noting the deal could also generate some additional logistics revenue from higher volumes. This is presently not factored into earnings estimates. JP Morgan is forecasting earnings per share (EPS) for Asciano of 6.2c this year and 9.4c in FY12.
Consensus EPS estimates according to the FNArena database stand at 7.0c and 10.1c respectively. This follows modest changes to forecasts to factor in the new contract.
The other big plus of the deal in UBS's view is it locks up around 15% of industry volume until 2016. This is important, as Asciano competitor Hutchison plans to enter the Sydney and Brisbane markets in 2013, so the Maersk deal helps protect Asciano's position.
In the view of BA Merrill Lynch, the signing of the contract with Maersk suggests Asciano is close to agreeing to terms for a new Enterprise Bargaining Agreement (EBA) with Ports workers. As BA-ML notes, Maersk would be unlikely to sign a deal without confidence that the Patrick division had some certainty with respect to its cost base going forward.
BA-ML notes the EBA is likely to deliver a 5.75% annual wage rise over three years, with 1% of this linked to productivity. Factoring in some productivity improvements could mean the actual nominal rate of increase is around 3-4%.
On news of the contract, brokers continue to take a positive view towards Asciano, the FNArena database showing the stock scores a perfect 8-for-8 Buy ratings. Goldman Sachs and Morgan Stanley are not part of the database but also rate Asciano as Buy, the latter within an In-Line view on the Australian infrastructure sector.
For RBS Australia the Buy rating is a valuation call, as on the broker's numbers Asciano is trading on an EBITDA multiple of around eight times in FY12. This is below peer multiples of around 10.3 times, which would imply a share price for Asciano of $1.97.
Asciano also looks better relative value than QR National ((QRN)) at current levels according to RBS, especially given potential catalysts such as the outcome of a current strategic review and ongoing coal rail contract signings.
Another attraction for UBS is certainty of earnings, as as much as 90% of forecast earnings growth in FY12 and 60% in FY13 is effectively locked in and is not reliant on industry volume growth. BA-ML also notes there continues to be potential for cost reductions, estimating automation in the port operations could save $25 per box lift. This could add as much as $50 million in EBITDA terms.
Shares in Asciano today are unchanged as at 12.00pm, with a last sale price of $1.695. Over the past year Asciano has traded in a range of $1.475 to $1.795, the current share price implying upside to the consensus price target according to FNArena's database of around 18%.
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